Building Your Portfolio - The Cautious Investor

The approach described here is for the long-term (10 years or more), cautious buy-and-hold investor who wants a safe portfolio that will grow in value but one that does not require constant attention. The approach is not a get rich quick scheme and does not promise to double or triple your money overnight, in a few months or even in a few years. Rather, with patience and perseverance, you'll build and manage a robust stock portfolio that grows in value year after year and protects you from serious losses.

The strategy is based on the well know sound investing principles of buy-and-hold, diversification, dollar-cost averaging and dividend reinvestment. When you apply these techniques for a long period, you will be rewarded with a money-making stock portfolio. And you'll have the satisfaction that comes from building and maintaining it.

What Should You Own?

The simplest way to participate in the United States stock market is to own a low-cost mutual fund that tracks the S&P 500. Another easy way to get started is to own a few stocks that pay dividends. For more information read: Starter Portfolio and Dividend Reinvestment Portfolio. Still another conservative approach to investing is to own the Dow Jones Select Dividend Index Fund, an exchange traded fund that owns 50 large dividend paying stocks. Read All About Dividends for more information on dividends, dividend-paying stocks and dividend-paying mutual funds.

Because the cautious investor chooses not to be too daring, you should buy broad market index funds, exchange-traded funds, low-fee equity income mutual funds or a few blue-chip stocks. And keep some cash so you can buy stocks at a bargain price. You can safely buy these investments and not have to watch them day after day. Yes, their prices will move up and down but over the long run their prices will rise and you'll make money.

Be very wary of most managed mutual funds. Some managed funds have outstanding long term performance records but most don't do better than the S&P 500, the bench mark against which fund performance is measured. And these funds charge you all kinds of fees. So you may under perform the S&P 500 and still have to pay excessive fees. This is not a good deal.

If you want to spend some time researching stocks, you could build your own mutual fund of well-known companies that pay dividends. For more information about building a mutual fund read Building Your Own Mutual Fund.

There are many ways to combine these investments. There is not just one optimal combination. For example you could own only the S&P 500. Or you could own the S&P 500 and a collection of other stocks. Finally you could own only individual stocks. No matter the mix of investments always keep 10% to 20% of your portfolio in cash so you can buy bargains as they come along. You do not have to be "fully invested" (all your money committed to stocks).

You should not buy cyclical stocks or mutual funds that concentrate on cyclical stocks because of their wide price fluctuations. To make money on cyclical stocks you have to time your purchases and sales, which requires that you regularly follow price changes.

Also, avoid mutual funds that concentrate on a single industry. These specialized funds make money as long as the industry they represents does well. But when the industry turns down, the fund price falls. For example, a mutual fund of only technology stocks tracks the technology cycle and is not truly diversified. Finally, ignore mutual funds that concentrate on foreign countries. Some of these country funds may do well but many are quite volatile.

Beware of the Wall Street Propaganda Machine

Wall Street professionals make their living by collecting fees and commissions when they sell you stocks, bonds, mutual funds and other financial products. They use a massive, well-tuned marketing machine to capture your attention and get your money. They want you to buy their wares at anytime and at any price. Therefore, you must be savvy and disciplined enough to resist the temptation to buy just because the pros say it's time to buy. For much more about the machine read Wall Street Buy Propaganda Machine. You'll find the story quite revealing.

Do You Need a Broker?

I have two stock portfolios - one with a broker and one without. My broker and I have worked together for 20 years. He has taught me much about successful investing and a greatly value his judgment. We've made money and lost money on individual stocks but overall my portfolio with him has done well. My other portfolio includes mostly dividend-paying stocks that I researched on my own. I manage this portfolio and it has made money.

The decision to work with a broker is one of personal preference. If you want lots of personal guidance, select a broker. Select one at a full-service brokerage house near you so you can meet him or her. Find a broker that plans to stay in the profession for a long time so you can establish a long-term working relationship.

Don't Pay too Much

A key to profitable investing is not to pay too much for an investment. Stocks, bonds, real estate and commodities go up and down in price. It's important that you buy when prices are going up (known as the upside). And of equal importance is not to buy when prices are falling (the downside).

When you buy on the upside, you have a good chance that prices will rise after you buy. But if you buy on the downside, chances are good that prices will continue to fall - a stock that dropped from $50 to $10 was not a bargain at $35.

Of course if you bought on the upside near the peak price, you probably won't make money either. So even when you buy on the upside, you have to careful not to pay too much. To learn more about how to decide when to buy read: Making Buy Decisions, Buy on the Upside and Never Buy on the Downside, Price Bubbles and Buying at the Peak.

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